Retail ties help Sinopec move to mixed ownership

Refiner takes the lead in pioneering the opening-up of State-owned enterprises

Oil and natural gas giant China Petroleum and Chemical Corp (Sinopec) is leading the country's latest round of State-owned enterprise reform as it explores an innovative way to increase the value of national assets.

The crude refining conglomerate announced plans to sell a stake valued at 107.1 billion yuan ($17.5 billion) in its retail business to 25 investors that hail from a range of domestic and foreign industries.

According to a recent company statement, these investors will have a combined 29.99 percent stake in the retail unit, which includes a wholesale business, more than 30,000 gas stations with 23,000 convenience stores, oil pipelines and storage facilities.

After the sale, the equity value of Sinopec's retail unit will reach 357.1 billion yuan, above market expectations of 300 billion yuan.

Sinopec spokesman Lyu Dapeng said the transaction will be the world's biggest merger and acquisition deal this year and it will create a mixed-ownership structure.

The move is a response to the central government's call to sectors dominated by SOEs to be more open to private investors.

Lyu said bringing private investors into its retail sector is just the beginning.

Recently, the company announced that it would, for the first time, recruit professional executives, a signal that it would focus more closely on capital management. Chairman Fu Chengyu said that move would push forward the reform of SOE management.

Among the 25 investors, 12 are domestic companies that will invest 59 billion yuan of the total. Eleven of those companies are private capital investors that will jointly invest 38.29 billion yuan, accounting for 35.8 percent of the total. China Asset Management Co Ltd will invest 8.15 billion yuan for a 2.28 percent stake in the retail unit through two overseas subsidiaries.

Harvest Fund Management Co Ltd, one of China's biggest asset managers, will invest 5 billion yuan for a 1.4 percent stake. It has set up a new 10 billion yuan fund called Harvest Yuanhe, and half of that amount will be invested in the Sinopec stake, said Harvest Fund on Tuesday. The rest will be used to buy fixed-income securities.

Zhao Xuejun, general manager of Harvest Fund, said the fund will help investors benefit from SOE reforms.

Harvest Yuanhe is the first closed-end fund approved by the China Securities Regulatory Commission in 12 years.

Han Xiaoping, chief information officer of China Energy Net Consulting Co, said participation of public funds and insurance companies in Sinopec's reform is in line with SOEs' principle of benefiting the public.

"It can be a good way to pay back the public by bringing more social security funds and pension funds into SOE reforms," Han said.

Li Li, research and strategy director at ICIS C1 Energy, a Shanghai-based energy information consultancy, said the funds will help Sinopec grow. She said that Sinopec's reform is not limited to raising capital but also includes downstream operational cooperation with multiple partners to boost its performance.

Sinopec has signed cooperation agreements in the past two months with many companies, including Fosun International Ltd, Taiwan-based Ruentex Development Co Ltd, business-to-consumer online supermarket Yhd, logistics company SF Express Co Ltd, gas supplier ENN Energy Holdings Ltd, Tibet Highland Natural Water Ltd and appliance producer Haier Electronics Group Co Ltd.

"Sinopec is looking for expertise and ideas to boost its nonfuel business, which is expected to have huge potential to grow," Li said.

In the West, nonfuel business accounts for more than 50 percent of a gas station's profits. Up to 69 percent of the gas stations in the United States are supported by a convenience store. But more than 99 percent of Sinopec's retail sales come from fuel.

Sinopec said that nonfuel business can be a "gold mine" for the company. Revenue from products other than fuel totaled 13.3 billion yuan in 2013, and it expects the figure to reach 15 billion yuan in 2014.

"Sinopec has strong capabilities in upstream oil and gas exploration and production, but it is not a professional in the retail business," Li said. "That's why there is only one energy company among dozens of its partners."

The cooperation has already started to benefit the company.

Chai Zhiming, deputy chief executive of the retail unit, said that eight gas convenience stores with new products and services provided by Sinopec's partners in Shanghai achieved a 50 percent rise in daily revenue during a soft opening.

ENN, the only energy company among Sinopec's partners, specializes in downstream natural gas distribution.

Li said that compared with PetroChina Co Ltd, the country's biggest oil and gas producer, Sinopec needs a "helper" in the gas sector. "The next step of Sinopec's reform will be public listing and integration afterward," Li said. "The integration with partners is not an easy task, and it takes time to see it through."